ASC ALERT
A publication of The ASC Institute • February 2016 • No. 16-01
© ASC Institute All rights reserved except permission is expressly granted to duplicate this publication for internal purposes only.
IRS Issues New Guidance Regarding Mid-Year
Amendments to Safe Harbor 401(k) Plans
By John P. Griffin, J.D, LL.M. and Charles D. Lockwood, J.D, LL.M.
the first day of the plan year and remain in effect for the
entire 12-month plan year. Treas. Reg. §1.401(k)-3(e)(1)
also provides that a safe harbor plan will not satisfy the
nondiscrimination requirements for a plan year if the
safe harbor plan is amended to change those provisions
during the plan year. Treas. Reg. §1.401(m)-3(f) includes
similar provisions for matching contributions under a
safe harbor 401(k) plan.
The IRS finally has issued guidance [Notice 2016-16] regarding
the types of amendments that may be made during the plan year
under a safe harbor 401(k) plan. There has been much debate in the
pension community regarding the ability to amend a safe harbor
401(k) plan mid-year and the IRS generally has been silent on the
extent to which mid-year amendments could be made under a safe
harbor 401(k) plan without jeopardizing the safe harbor status of
the plan. Now, with the issuance of Notice 2016-16, many of the
questions surrounding mid-year amendments have been answered
and, in most cases, such amendments will be allowed as long as the
plan meets certain notice and timing issues. This article is designed
to answer many of the questions that have been addressed (or not
addressed) under Notice 2016-16. [See Q&A-4 for the application of
Notice 2016-16 to safe harbor 403(b) plans.]
The safe harbor plan regulations set out certain exceptions
to the mid-year amendment requirement, including the
ability to amend the plan during the plan year to reduce
or suspend safe harbor contributions, provided the plan
satisfies certain notice and timing requirements. In
addition, the IRS has indicated in informal speeches that
certain other mid-year amendments may be permitted.
Notice 2016-16 formalizes the situations under which
mid-year amendments may be made to a safe harbor
401(k) plan.
ASC Insight: As discussed in this ASC Alert, Notice 2016-16
generally allows for mid-year amendments to safe harbor 401(k)
and 403(b) plans effective January 29, 2016. One question
that is not answered in Notice 2016-16 is whether (and when)
plans must be amended to address the mid-year amendment
provisions under Notice 2016-16. Although the ASCi plans do
not specifically prohibit the adoption of mid-year amendments
under the safe harbor 401(k) or 403(b) plans, it is our intention
to adopt an interim amendment specifically allowing for midyear amendments as authorized under Notice 2016-16. Given
the possibility of additional guidance and additional interim
amendments from the IRS, we will probably not issue an
interim amendment until sometime in early December. The
adoption of the interim amendment in December 2016 will
allow employers to adopt mid-year amendments during 2016
as permitted under Notice 2016-16.
Q&A-1
Q&A-2 What is a mid-year amendment for purposes of applying
the provisions of Notice 2016-16?
For purposes of applying the guidance under Notice
2016-16 with respect to mid-year amendments of safe
harbor 401(k) plans, a “mid-year amendment” is:
• a change that is first effective during a plan year, but
not effective as of the beginning of the plan year, or
• a change that is effective as of the beginning of the plan
year, but adopted after the beginning of the plan year.
In applying the mid-year amendment rules under Notice
2016-16, the rules apply to both traditional safe harbor
401(k) plans and Qualified Automatic Contribution
Arrangements (QACAs). See Q&A-4 for application of
these rules to 403(b) plans.
Why are mid-year amendments restricted under safe
harbor 401(k) plans?
Treas. Reg. §1.401(k)-3(e)(1) provides that a plan will
fail to satisfy the safe harbor requirements under
Code §§401(k)(12) (‘traditional’ safe harbor 401(k)
plans) and 401(k)(13) (qualified automatic contribution
arrangements (QACAs)) and Treas. Reg. §1.401(k)-3
unless the safe harbor plan provisions are adopted before
Q&A-3 What are the requirements for making mid-year
amendments under Notice 2016-16?
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Under Notice 2016-16, different rules apply based on
whether the mid-year amendment modifies the language
under the required annual safe harbor notice.
Amendment modifying annual safe harbor notice.
If a mid-year amendment modifies the language under
the required annual safe harbor notice, the mid-year
amendment will not violate the requirements of Treas.
Reg. §§1.401(k)-3 and 1.401(m)-3 provided the plan
satisfies certain notice and timing requirements, as
described in Q&A-5 below, and the mid-year amendment
is not one of the prohibited mid-year changes described
in Q&A-6 below.
Amendments that do not modify the annual safe
harbor notice. If a mid-year amendment does not
affect the required annual safe harbor notice, the midyear amendment need not satisfy the notice and timing
requirements described in Q&A-5. The mid-year
amendment only needs to be an allowable mid-year
amendment (i.e., a mid-year amendment that is not a
prohibited mid-year amendment described in Q&A-6
below).
Certain allowable mid-year amendments. Notice 201616 lists certain mid-year amendments that are specifically
allowed, provided the requirements under the regulations
are satisfied:
1. Updated safe harbor notice. An updated safe harbor
notice that describes the mid-year change and its
effective date must be provided to each employee
otherwise required to be provided a safe harbor notice
under Treas. Reg. §§1.401(k)-3(d), 1.401(k)-3(k)(4), or
1.401(m)-3(e), as applicable, within a reasonable period
before the effective date of the change.
2.Timing of updated safe harbor notice. Whether the
timing requirement is met is based on all of the relevant
facts and circumstances. The timing requirement is
deemed satisfied if the updated safe harbor notice is
provided at least 30 days (and not more than 90 days)
before the effective date of the change. If it is not
practicable for the updated safe harbor notice to be
provided before the effective date of the change (e.g.,
because the plan amendment is made retroactively for
the entire plan year), the notice is treated as provided
timely if it is provided as soon as practicable, but not
later than 30 days after the date the change is adopted.
3. Reasonable opportunity to change deferral election.
Each employee required to be provided an updated safe
harbor notice must be given a reasonable opportunity
before the effective date of the mid-year change to
update his/her deferral election. For this purpose, a
30-day election period is deemed to be a reasonable
period to make or change a deferral election. If it is not
practicable for the election opportunity to be provided
before the effective date of the change, an employee is
treated as having a reasonable opportunity to make or
change an election if the election opportunity begins
as soon as practicable after the date the updated notice
is provided to the employee, but not later than 30 days
after the date the change is adopted.
1. Change in plan year, including the adoption of a
short plan year. A safe harbor 401(k) plan may be
amended mid-year to change the plan year provided
the amendment satisfies the requirements under Treas.
Reg. §§1.401(k)-3(e)(2), (3), and (4) and 1.401(m)-3(f)
(2), (3), and (4)).
2. Adoption of safe harbor plan status on or after the
beginning of the plan year. A plan may be converted
to a safe harbor 401(k) plan mid-year only to the
extent allowed under Treas. Reg. §§1.401(k)-3(f) and
1.401(m)-3(g)).
Q&A-6 Are there any mid-year amendments that are prohibited
under Notice 2016-16?
3. Reduction or suspension of safe harbor contributions
or changes from safe harbor plan status to non-safe
harbor plan status. A safe harbor 401(k) plan may be
amended mid-year to reduce or suspend the safe harbor
contribution to the extent permitted under Treas. Reg.
§§1.401(k)-3(g) and 1.401(m)-3(h)).
Section III.D. of Notice 2016-16 lists certain mid-year
amendments that are prohibited, regardless of whether
the plan otherwise satisfies the mid-year amendment
conditions described in Notice 2016-16. However, a
mid-year change is not a prohibited mid-year change
if it is required by applicable law to be made mid-year,
such as a change mandated by a statutory law change or
court decision. The following mid-year amendments are
prohibited mid-year amendments under Notice 2016-16:
Q&A-4 Do the mid-year amendment rules under Notice 2016-16
apply to 403(b) plans?
The mid-year amendment rules under Notice 2016-16
applicable to safe harbor 401(k) plans apply on similar
terms to §403(b) plans. Thus, a safe harbor 403(b) plan
may be amended during the plan year if the plan satisfies
the mid-year amendment conditions described under
Notice 2016-16.
1.A mid-year change to increase the years of service
required to receive the safe harbor contribution
under the plan.
2.A mid-year change to narrow the group of
employees eligible to receive the safe harbor
contributions. This prohibition does not apply to
an otherwise permissible change that only applies to
employees who are not already eligible to receive safe
harbor contributions under the plan.
Q&A-5 What are the requirements for making mid-year
amendments that affect the required annual safe harbor
notice?
Under Notice 2016-16, if a mid-year amendment modifies
the language included in the required annual safe harbor
notice, the plan must satisfy the following notice and
timing requirements in order to qualify as a safe harbor
401(k) plan.
3. A mid-year change to the type of safe harbor plan;
for example, a change from a traditional § 401(k) safe
harbor plan to a QACA § 401(k) safe harbor plan.
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4. A mid-year change to modify (or add) a matching
contribution formula if the change increases the
amount of matching contributions or allows for
a discretionary matching contribution formula.
However, this prohibition does not apply if the
amendment is adopted and the updated safe harbor
notice is provided as required under Q&A-5, and the
amendment increasing the matching contribution is
made retroactively effective for the entire plan year.
This may require an additional amendment to use
plan year compensation for purposes of determining
the new matching contribution formula. In addition,
any amendment under this section to increase the
matching contribution formula under the plan must be
made at least 3 months prior to the end of the plan year.
Q&A-7
May a safe harbor 401(k) plan be amended mid-year to
change from a safe harbor employer contribution to a
safe harbor matching contribution, or vice versa?
There is no clear guidance in Notice 2016-16 regarding
a change from one type of safe harbor contribution to
another type of safe harbor contribution. Although the
Notice sets out specific requirements for making midyear amendments and allows for the retroactive addition
of matching contributions (see Q&A-6), it does not
appear an amendment changing the type of safe harbor
contribution would be permitted. The change from one
type of safe harbor contribution to another would require
the plan to eliminate the original type of safe harbor
contribution. Under the regulations, any elimination of a
safe harbor contribution can only be done prospectively
and causes the safe harbor plan to lose its safe harbor
status. Thus, without specific guidance on this issue,
it would appear that such an amendment would not be
permitted.
Q&A-8
Q&A-9
What is the effective date of the mid-year amendment
requirements under Notice 2016-16?
The mid-year amendment requirements under Notice
2016-16 are effective for mid-year changes made on or
after January 29, 2016.
Q&A-10 How does Notice 2016-16 affect the restatement of preapproved safe harbor 401(k) plans?
Notice 2016-16 does not address the restatement of preapproved plans and whether a mid-year restatement of
a pre-approved plan violates the mid-year amendment
prohibition. Informally, the IRS has stated the mere
restatement of a plan for PPA does not constitute a midyear amendment, as long as no other changes are made to
the plan document that would otherwise qualify as a midyear amendment. Presumably, this position still applies
as long as the restatement does not change any provisions
under the required annual safe harbor notice.
ASC Insight: Because of the uncertainty surrounding mid-year
amendments, ASC encouraged document providers to restate
adopting employers’ safe harbor 401(k) plans for PPA by the
end of 2015 with a January 1, 2016 effective date. If a preapproved safe harbor 401(k) plan was not restated by the end
of 2015, the plan must be restated by April 30, 2016 with a
January 1, 2016 effective date. To the extent no provisions are
changed that modify the required annual safe harbor notice, the
mid-year restatement should not affect the safe harbor status
of the plan. If, as part of the restatement, an amendment is
made to the plan that would constitute a mid-year amendment,
the plan restatement would still need to be effective January
1, 2016 but the mid-year amendment language would need to
be effective as of January 1, 2017 or would need to satisfy
the requirements of Notice 2016-16, including the notice and
timing requirements applicable to mid-year amendments.
Are there any special rules that apply to mid-year
amendments relating to plans involved in mergers and
acquisitions?
Notice 2016-16 does not specifically address plans
involved in a merger/acquisition. However, the IRS has
specifically requested comments as to whether additional
guidance is needed to address mid-year changes relating
to plan sponsors involved in mergers and acquisitions.
Comments may be submitted to Internal Revenue
Service, CC:PA:LPD:PR (Notice 2016-16, Room 5203,
P.O. Box 7604, Ben Franklin Station, Washington,
DC 20044, or electronically to Notice.Comments@
irscounsel.treas.gov.
ASC Alerts are published as an information service for ASC clients. Articles are general in nature and are
not a substitute for professional advice or opinion in a particular case.
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